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Hello MT,
I'm surprised no one has responded to this, so I'm forced to post my
blabber, even though I'm not a bond person:
Friday, December 31, 2004, 7:46:30 AM, you wrote:
> Right now the ONLY reasons that it doesn't correct, is
> 1) foreign central banks (of Japan and China) are intervening to support
> the plummeting dollar, throwing billions into US bonds (I've done a
> chart with the dates and amounts of intereventions and the impact on
> JPY-USD and bond markets -- the week after the Japanese stopped
> intervening in March-2004, bonds crashed losing >10% of their value in
> 40days, which is a HUGE 100bp move). The Japanese and Chinese now have
> accumulated over $1 trillion in US treasuries, which are losing value
> everyday as dollar sinks further. For how long more they can keep losing
> and ADD to losing positions, I have no idea!
Asia will stop intervening and dump when they either don't need to or when they
are forced to. They wish to prop the dollar until China's consumer class matures. But... the
dollar falls because "the market knows," forcing China to think about
floating their currency sooner than they wish to.
As you know, as for the Euro, the Mexican Peso, and the rest: they rally because they are
"Not Dollars" and rally as a hedge over the uncertainty over China
floating. Combine that with today's markets' love affair with the Chinese,
and the growing faith in a unified Europe, and you get a chorus over
whether the US Dollar will remain as the Reserve Currency.
Forget Iraq, that's for non-traders. As for America's
multi-generational addiction to debt: America has had this type of debt for years. But because of China,
and the newfound confidence in Euro Unification, this weakness about
America's debt suddenly matters.
Having said this, let's go beyond the usual interventions and realize
today's current over-estimation of the Chinese, followed by years of underestimating them. The Chinese
are human too, and are just as susceptible of screwing up
on the way, causing the dollar to jump, as well as a renewed tolerance for
low interest rate US bonds.
> 2) the leveraged carry trade played by funds with other people's money.
> Basically the fact that real interest rates have been negative for so
> long (blame the Fed for that) has "forced" fund managers to take extreme
> risks in the "search for yield" (there was a recent paper by Bank of
> England on this issue and the implications to the stability of the
> system (i.e. new LTCMs in the making)
Interesting. REIT's maybe?
> Personally I find it unbelievable the the Fed is doing this to the
> American people, EFFECTIVELY DOUBLING DOWN the stock bubble of the late
> 1990s. This policy of too much credit, has inflated all asset classes
> (real estate, stocks etc) and when the inevitable correction comes, the
> pain will be much greater for everyone.
I think it's based on mass psychology engineering established from
things that worked in the past. But they are breaking down today. The
market is smelling a dead rat around the corner.
As for the American People, they are intoxicated with the opium of
credit, which has kept them content and mute. This cannot be sustained,
since human beings are addictive in nature and will always want more
until they lose access to the drug and cry wolf in pain. It's up to
our youth to solve this.
> What would be better: if Nasdaq composite topped at 5,000 or 15,000 ?
A Nasdaq 15,000 is better if our own children are the ones leading the
world.
> People/investors should get IMMEDIATELY out of longer-term bonds (10yr
> and 30yr ones) at these valuations. Get out of any bond funds in their
> IRAs. If they absolutely HAVE to have US bonds in their portfolios, they
> should buy shorter-term bonds (2yr or 5yr MAX) or TIPS (which are
> inflation-protected, but as explained Fed "steals" from those bond
> holders because it mis-reports true inflation). Or buy "reverse bond
> funds" (which gain as interest rates rise). Until real interest
> rates stop being NEGATIVE.
> Traders could ofcourse short bonds.
As I said, I'm not a bond person, so is the E-CBOT ZB a fair proxy?
Looking at it I see distribution, which supports your claim.
> Hope this helps. As I explained (see charts below of Japanese
> intervention vs bond yield/price), this is an accident waiting to
> happen.
Yes. A necessary generational "kick in the butt".
-F
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